Professor Robert Deutsch

If ever there was any doubt as to the status of Australia’s reputation as the lucky country all doubt appears to have been removed by the recent debate regarding a 1% company tax rate cut for the very narrow sector of small business which is fortunate enough to operate through the medium of a company.

The proposal for those who missed it, is that one of the carrots to compensate for the stick that is the Minerals Resource Rent Tax (the technical name for the mining tax) would be a reduction in the company tax rate from 30% to 29% for incorporated small businesses. The planned start date is 1 July 2012. Small business in this context as currently planned will be defined broadly as any business carried on through a company where the annual turnover is no more than $2 million. According to some estimates this will deliver tax cuts for 720,000 incorporated small businesses out of a total of small businesses conducted through sole tradership’s companies partnerships etc of 2.4 million. The cost to government revenue in the first year is expected to be in the order of $200 million which would in part be funded by a $1.4 billion revenue take from the proposed mining tax based on current estimates.

Let us for a moment look at it from the micro perspective of an incorporated small business rather than from the macro perspective of the government. A business with an annual turnover of $2 million (which is the current proposed upper threshold to qualify as a small business) might reasonably have taxable income of $1 million assuming deductible costs against turnover of $1 million. Tax currently would therefore amount to $300,000 which after the proposed corporate tax reduction would be reduced to $290,000.

Of course all this assumes that the incorporated small business in question is profitable. If it is not, it is unlikely to be paying any tax and accordingly a 1% tax reduction even for such an entity would be meaningless.

Even when looking at profitable incorporated small businesses, most would be lucky to have the numbers suggested in the previous paragraph. More likely the numbers would be half that suggested and thus give rise to net annual savings of only $5000.

Without wishing to belittle the savings that might be achieved, one would have thought that at a micro level they are so marginal as to make almost no difference to the ongoing viability and profitability of most incorporated small businesses.

At a macro level $200 million in costs is a very small hit to a government budget which runs into many many billions. In any event one would think that if the government is to expend some of the yet to be proven revenue from the mining tax, there are far better ways to utilise those funds for the benefit of small business. Perhaps an upfront grant of $5000 to any newly established small business (in whatever form) which employs at least 2 unrelated individuals would be of far more benefit to the individual enterprise and to the economy as a whole, than a miniscule tax cut to existing profitable incorporated small businesses. Based on those numbers this could aid in the establishment of 40,000 new small businesses.

How we can spend so much time and energy arguing about so little is quite remarkable. We are undoubtedly the lucky country if this 1% tax reduction for such a small group occupies our headlines so extensively.

Professor Robert Deutsch is from the School of Taxation and Business Law, Australian School of Business UNSW. This opinion piece first appeared in The Australian on 16 March 2012.